survey of energy resources: focus on shale gas

Survey of Energy Resources: Focus

on Shale Gas

World Energy Council 2010

energy for the

Officers of the World Energy Council

Pierre Gadonneix

Chair

Francisco Barnés de Castro

Vice Chair, North America

Norberto Franco de Medeiros

Vice Chair, Latin America/Caribbean

Richard Drouin

Vice Chair, Montréal Congress 2010

C.P. Jain

Chair, Studies Committee

Younghoon David Kim

Vice Chair, Asia Pacific & South Asia

Jorge Ferioli

Chair, Programme Committee

Marie-José Nadeau

Vice Chair, Communications & Outreach Committee

Abubakar Sambo

Vice Chair, Africa

Johannes Teyssen

Vice Chair, Europe

Abbas Ali Naqi

Vice Chair, Special Responsibility for Middle East &

Gulf States

Graham Ward, CBE

Vice Chair, Finance

Zhang Guobao

Vice Chair, Asia

Christoph Frei

Secretary General

Survey of Energy Resources: Focus on Shale Gas


Copyright © 2010 World Energy Council

All rights reserved. All or part of this publication may be used or

reproduced as long as the following citation is included on each

copy or transmission: „Used by permission of the World Energy

Council, London, www.worldenergy.org‟

Published 2010 by:

World Energy Council

Regency House 1-4 Warwick Street

London W1B 5LT United Kingdom

ISBN: 978 0 946121 05 2

Survey of Energy Resources: Focus on Shale Gas

Survey of Energy Resources: Focus on Shale Gas World Energy Council 2010

1

Foreword Executive Summary 3

1. Emergence of Shale Gas 7 2. Impact of Shale Gas 21 3. Strategic implications 27 4. References 32

Contents

World Energy Council 2010 Survey of Energy Resources: Focus on Shale Gas

2

The energy sector around the world is

undergoing major changes resulting from

increasing competitive pressures and concerns

about costs, security of supply and the

environment. At the same time, 1.6 billion

people, almost a quarter of the world

population, do not have access to commercial

energy and the need for energy infrastructure

investment is huge. The energy challenges are

not the same in all regions. While rapidly

burgeoning economies in the developing world

are focusing on expanding energy access to

support their economic growth and provide

basic energy services to their citizens,

industrialised countries are focusing on

securing energy supplies in a competitive

environment and in a publicly and

environmentally acceptable way. In recent

years, shale gas has been making headlines as

a potential solution for many of the energy-

related challenges, in particular in the United

States. A number of studies on shale gas have

been conducted, the majority focusing on the

assessment of the resource base and the role

of emerging technologies, which can

significantly increase the current reserve

estimates.

The World Energy Council has just completed

work on its 22nd Survey of Energy Resources

and based on this work, it was decided to

produce a “Focus on Shale Gas” report to

provide a fact-based and forward-looking

contribution to the on-going discussion about

shale gas. An ad-hoc team of experts led by

Richard Davis of RTI International included

Vikram Rao of RTEC (former Chief Technology

Officer of Halliburton) and Carl Bauer of C.O.

Bauer Consulting (former Director of the U.S.

National Energy Technology Lab). The Survey

of Energy Resources joint-editors Judy

Trinnaman and Alan Clark, and RTI

International experts James Trainham and

David Myers contributed their insights. The

project was managed by Elena Nekhaev, WEC

Director of Programmes.

WEC Survey of Energy Resources

The starting point for any discussion about

energy is the availability and type of primary

energy resources, technologies for their

exploration, production and utilization,

associated costs and other aspects, including

public acceptance and the environment. For

over 70 years, WEC has been producing a

triennial Survey of Energy Resources based on

the research conducted using its membership

network, regional energy organisations and

various other expert bodies. The Survey is the

most comprehensive collection of data and

other relevant information about global energy

resources conventional, unconventional and

renewable resources. Electronic copies of the

Survey are available for downloading from the

WEC website at www.worldenergy.org free of

charge.

Rich Davis, RTI International, USA

Foreword

http://www.worldenergy.org/


3

Today, the global energy industry is facing a

growing number of uncertainties, including price

volatility, rising demand and increasing costs

which are leading to greater pressures for

energy producers and consumers alike.

Furthermore, almost a quarter of the world

population has no access to modern energy

and little hope of joining the world‟s energy

consumers any time soon. It is clear that the

current energy system is unsustainable. Can

shale gas induce badly needed changes?

In its quest for secure, sustainable and

affordable supplies of energy, the world is

turning its attention to “new” and promising

energy resources. Shale gas is one of them,

and it has been making headlines in the past

couple of years. It seems to be abundant and

globally available. Massive recoverable

deposits of shale gas have been identified in

North America, where the first commercial gas

well was drilled nearly two hundred years ago,

in 1821.

Emerging Shale Gas Plays

According to geologists, there are more than

688 shales1 worldwide in 142 basins. At

present, only a few dozen of these shales have

known production potentials, most of those are

in North America. This means that there are

literally hundreds of shale formations worldwide

that could produce natural gas. The potential

volumes of shale gas are thought to be

enormous and this is likely to change the

natural gas markets significantly, particularly in

1

Shale is one of the major types of sedimentary rocks.

the United States and Europe, and also LNG

(Liquefied Natural Gas) markets worldwide.

Developing shale gas infrastructure will be

costly, but today in 32 of the 142 basins there is

some existing infrastructure that could reduce

initial capital expenditures related to exploitation

of shale gas. However, even in these basins

there is likely to be significant need for capital

investment to process, store and distribute the

gas through a pipeline system. In the remaining

110 basins with no existing infrastructure, the

required investment will be considerable and

this may result in delaying new production

coming online or make the entire exploitation

uneconomic, although for strategic or other

reasons, shale formations may be still worth

exploiting. Of course, each shale formation will

be evaluated on its own merit.

Shale Gas Resource Base

and Current Developments

While it is believed that the shale gas resource

base is both large and wide-spread, the

resource has not yet been quantified on a

national level for most countries. The most

credible studies (IGU 2003, VNIIGAS 2007,

USGS 2008, BGR 2009) put the global shale

gas resource endowment at about 16,110tcf or

456tcm compared to 187tcm for conventional

gas. It is assumed that nearly 40% of this

endowment would be economically

recoverable. The US and the CIS together

account for over 60% of the total estimate.

European resource estimates, on the other

Executive Summary


4

hand, are not very impressive at slightly over

7% of the estimated global resources, and

China and India on current estimates hardly

reach a 2% share each.

It should be emphasised that these are best

estimates available today and they can change

significantly when more proper assessments

are performed. The US provides an

enlightening example. In 2007, US shale gas

resource base (see Definitions at the end) was

estimated at 21.7 tcf, but only a year later it was

revised up to 32.8 tcf. At the end of 2008, shale

gas accounted for 13.4% of US proved

reserves of natural gas, compared with 9.1% at

the end of 2007.

Approximately one half of these new proven

reserves are shale deposits, the rest are

contained in coal seams and sandstone. Even if

the current attention on shale turns out to be no

more than a temporary boon, further

development of natural gas infrastructure will be

useful for other sources of natural gas.

Moreover, the advancement of technology used

to exploit shale gas will spur further technical

advancements for other energy resources. An

additional major challenge to developing shale

plays will be the need for new or expanded

pipeline infrastructure near these shales.

Oil majors and other global companies are

expanding their shale gas activities outside the

United States. For example, ExxonMobil and

Marathon Oil have launched shale gas

operations in Poland. France, Germany,

Sweden, Austria and other European countries

are also establishing shale gas activities.

Strategic Implications

The emergence of shale gas as a potentially

major energy resource can have serious

strategic implications for geopolitics and the

energy industry. Although global resource

estimates are still mostly theoretical, analysis

leads to the following conclusions (see

Strategic Implications Section for more detail):

1. Based on the current reserve estimates

in Europe, Russia and Southeast Asia,

Russia stands to be the European and

Southeast Asia winner in shale gas.

The on-going rapid depletion of

Europe‟s own scarce natural gas

resources coupled with the economic

growth in China and India will result in

additional demand for Russian gas.

Consequently Russian gas, including

shale gas will likely be used in Europe

and Southeast Asia for decades.

2. European shale gas resources are

likely to be less than desired by many

countries. Although shale gas

exploitation can benefit some European

countries, it will not significantly reduce

dependency on gas imports from

Russia and the Middle East.

3. The proved reserves of shale gas in

North America and the existing LNG

infrastructure create the potential of

LNG exports to Europe, which can help

Europe to diversify its natural gas

supply sources. This is likely to provide

marginal quantities of natural gas and


5

not materially replace demand for

Middle Eastern or Russian gas.

4. Shale gas resources in the United

States will keep natural gas prices

relatively low for an extended period of

time. Longer periods of lower gas

prices will likely result in additional

demand for gas from the transportation

and power generation sectors.

5. LNG will face short to medium-term

headwinds as a result of increasing

natural gas supplies which cause price

declines. Over the long-term, LNG is

likely to be the winner as a result of the

improved infrastructure built to exploit

shale gas. In areas where shale gas

resources are depleted, the

infrastructure will remain and will thus

provide broader downstream

distribution opportunities for LNG.

6. The environmental impact of hydro-

fracturing processes used in shale gas

exploitation will likely draw political and

public attention to shale gas and

increase the costs of extraction.

7. The use of shale gas will have a

significant impact on CO2 emissions

and on the imperative to implement

clean coal technologies and Carbon

Capture Storage. The more shale gas

available, the less need for clean coal

and CCS and vice-versa.

Demand Shifting

As shale gas production ramps, regional natural

gas prices are likely to decline and the gas use

to expand. As long as power generators

assume that gas prices will be lower than coal

on a BTU basis (potentially also including

carbon mitigation costs), they will shift toward

using more natural gas power generation.

Low gas prices and increased supplies over the

long-term could provide an incentive to the

industry to introduce wholesale shifts in oil

replacement. This can occur at two levels. The

first will be the direct use of CNG (Compressed

Natural Gas) for transportation, likely mostly for

public transport. Diesel replacement in the

commercial sector in environmentally sensitive

areas will likely take place. The second could

be by increased use of GTL (Gas-to-Liquids),

especially from gas stranded without pipelines

to demand areas. An example of this would be

Alaska North Slope gas. A future with a low

price of gas would incentivise research in

improving GTL economics. Were this to be

successful, GTL derived fuel could become a

significant force in the transport fuel market,

since it is extremely clean, and the net impact

on the environment would go well beyond mere

oil replacement.

Conclusion

It can take decades to realise all the

consequences of the increased production and

use of shale gas on natural gas markets, in

particular. There are a number of uncertainties

which can have a significant impact on the


6

future of shale gas. Given the fact that there are

still significant producing reserves of

conventional natural gas around the world,

there may not be sufficient incentive, on a

regional basis, to identify or exploit

unconventional natural gas in the near term. It

may also be the case that the amount of energy

needed to produce unconventional gas is

considerably higher than for conventional gas.

Developing nations will also face the challenge

of the cost and time to develop both the

resource and infrastructure as economic returns

will be initially small.

It is impossible to put a numeric value on

security of supply, but replacing oil imports from

politically sensitive parts of the world by

domestic shale gas production is perhaps the

main driver in the United States.

The advantages of

expanding the use of shale

gas include:

Adding significant quantities of natural

gas to the global resource base;

Shorter time to first production compared

to conventional gas;

Using cleaner energy resource;

Broader use of new drilling technologies

around the world; and

Improved security of supply for gas-

importing countries.

On the other hand, the most often mentioned drawbacks are:

Uncertainty over costs and affordability;

Doubts about the environmental

acceptability of the production

technology;

Unclear rates of decline which may

materially impact reserve estimates; and

Local opposition to shale gas

development.

It would seem that although shale gas holds

much promise, the eventual course of its

development cannot be predicted at present.

Helge Lund, Chief Executive of Statoil, was

quoted by the Financial Times in FT.com in

March 2010 as saying „it is far too early to

conclude whether shale gas will make as much

of an impact outside the US as it has done

inside the US‟.


7

1.1 Definitions

Shale gas belongs to the category of

unconventional natural gases, which also

includes coal-bed methane, gas from tight

sandstones („tight gas‟) and methane hydrates.

Shale is a sedimentary rock formation which

contains clay, quartz and other minerals. Much

of the oil or gas formed in the shale (this body is

known as source rock, being the source of the

hydrocarbon) migrates to porous and

permeable rock, such as sandstone, for

example.

(For further definitions refer to end of the

report).

Where shale gas is found

It could be assumed that shale gas is always

found proximal to conventional reservoirs. In

fact source rock exists in many settings where

no conventional reservoir rock is available for

permeation of natural gas. This is why the shale

gas resource is expected to be plentiful.

Virtually all the US deposits are in very old rock.

In comparison, gas in the Gulf of Mexico is

found in younger rock. The age and depth of

the shale gas deposits assures that the fluid is

in gaseous form and essentially no associated

oil is found. Similar source rock can be found in

other parts of the world, even in those without

significant conventional gas reservoirs. The

depth of shale gas varies. In most cases it is

shallower than conventional gas reservoirs, but

in some cases, it could be as deep or deeper

than conventional reservoirs.

1.2 Background

The first commercial gas well in the USA, drilled

in New York State in 1821, many years before

Drake‟s pioneer oil well, was in fact a shale gas

well. Subsequently, limited amounts of gas

were produced from shallow, fractured shale

formations (notably in the Appalachian and

Michigan basins). Until quite recently, however,

total US shale gas production was negligible,

being completely overshadowed by vastly

greater volumes of natural gas produced from

conventional sandstone and siltstone

reservoirs.

Although the existence of shale deposits across

the world has been well-known for many years,

most shales have not been regarded as

potential sources of commercial quantities of

natural gas as they have insufficient natural

permeability to permit significant fluid flow to a

well bore. The relatively few instances of

commercial shale gas extraction in the past

relied on the existence of natural fractures in

the formations. The transformation in thinking

about the shale gas potential that has occurred

in recent years is not attributable to the

discovery of new resources or the re-

assessment of old resource estimates but to the

development and application of new

technologies that in effect „create a permeable

reservoir‟ and achieve high rates of production.

This is why many consider this to be a resource

exploitation play rather than an exploration play.

1. Emergence of Shale Gas


8

1.3 Resource Base

Shale gas resources, although believed to be

widespread, have not as yet been quantified on

a national basis for most countries, apart from

the United States and a few other countries.

Recent studies estimate the resource

endowment (gas in-place) of five major shale

gas basins in the USA at 3,760 tcf, of which 475

tcf is considered to be economically

recoverable, while two Canadian basins are

estimated to hold 1,380 tcf, with about 240 tcf

recoverable.

Until recently the shale gas focus was mainly

on North America, but today the interest

towards shale gas is spreading to other

countries, too.



9

Preliminary studies have identified over 688 shales in 142 basins. Red = active

exploitation.

Source: Hopkins, Schlumberger

For example, the ARI (Advanced Resources

International) status report specifies three

European basins as of particular importance –

the Alum Shale in Sweden, the Silurian Shales

in Poland and Austria‟s Mikulov Shale.

Together, these basins are estimated to have a

shale gas resource of around 1,000tcf (roughly

30tcm), of which about 140tcf (4 tcm) is

considered to be recoverable.

The share of shale gas in US natural gas

production rose from 1.6% in 1996 to nearly

10% in 2008. There was a sharp jump in US

shale gas reserves estimates in 2008, from

21.7tcf at end -2007 to 32.8tcf a year later. At

end-2008, shale gas accounted for 13.4% of

US proved reserves of natural gas, compared

with 9.1% at end-2007. In particular, the

unexpected economic success of the Barnett

Shale project in Texas has generated a rush for

other sources of shale gas across the US and

Canada.

Outside North America, shale gas has not yet

been produced commercially because of a

limited geological knowledge about shale gas

and host reservoirs as well as the higher

technical and economic costs.

Exploration has commenced in Poland, the

country which today totally depends upon

Russia for its gas supplies, and where domestic

production of shale gas could change the

regional politics.

Similarly, India has very little domestic gas

production, and almost all of it is based on

young rock offshore. A costly pipeline from Iran

is being considered for supplies of natural gas

to India which currently pays market rates for

LNG, typically several times more than the

controlled price for domestic production. This

price was under US$3 per mBTU (US¢10/cm)

until it was recently raised to US$4.20.

(US¢15/cm) This is still considerably lower than

for the supply of LNG from Iran or Qatar, which

is estimated to reach US$13 (US¢46/cm) at the

point of delivery.

Notwithstanding the lack of accurate data, it

seems obvious that shale gas can contribute

significantly to the supplies of natural gas world-

wide.


10

It is unknown how many of the identified shales

around the world are thermally mature, gas

prone or potentially productive. Of the 688

shale formations, only a few dozen have been

explored for production capacities.

Consequently, resource and reserve estimates

can be susceptible to substantial change as

exploration progresses to new shale formations.

Further, geological evidence suggests that

shale gas may, in fact, be almost ubiquitous.

It is expected that as hydraulic fracturing

technology spreads, more accurate reserve

data will become available.

A considerable amount of exploration activity is

being undertaken with the objective of

establishing the location of viable shale gas

reservoirs, mostly by relatively small

companies, although there are signs of

increasing interest on the part of some of the

international majors. Examples of such activity

have been reported for the following countries:

Austria; Australia; Canada; China; France;

Germany; Hungary; India; New Zealand;

Poland; South Africa; Sweden; United Kingdom;

and the United States. Brief details of the

exploration companies and geological basins

involved in these countries are provided in the

Country Notes section of Chapter 5: Natural

Gas in the WEC Survey of Energy Resources,

2010 edition.

The volume of shale gas worldwide could

become a strategic factor for future energy use

and this is only now beginning to be

understood. Global and regional markets for

LNG, power generation, heating and transport

fuels could all be exposed to major changes in

the coming years as a result of this new ample

resource.

1.4 Technologies

The transformation in shale gas production has

been achieved largely by a combination of

horizontal drilling with hydraulic fracturing. In

this procedure, a well is sunk to a depth

somewhat less than that of a known shale gas

deposit and then gradually deviated until the

drill-bit is running horizontally through the shale

bed. Once drilling has been terminated, the

rock surrounding the horizontal bore is

perforated in a number of locations and artificial

fracturing induced by the high-pressure

injection of water combined with special

additives and sand - called a proppant - to keep

the fracture open.

The transformation in shale gas production has

been achieved largely by a combination of

horizontal drilling with hydraulic fracturing. In

this procedure, a well is sunk to a depth

somewhat less than that of a known shale gas

deposit and then gradually deviated until the

drill-bit is running horizontally through the shale

bed. Once drilling has been terminated, the

rock surrounding the horizontal bore is

perforated in a number of locations and artificial

fracturing induced by the high-pressure

injection of water combined with special

additives and sand to keep the fracture open -

called a proppant.


11

Estimated Shale Gas Resource Potential - 2001

North

America

3,840 Tcf

Latin

America

2,116 Tcf

West.

Europe

509 Tcf

Cent. & East.

Europe

39 Tcf

FSU

627 Tcf

Mid East &

North Africa

2,547 Tcf

Sub-

Saharan

274 Tcf

Cent. Asia &

China

3,526 Tcf

Pacific

2,312 Tcf

Kawata, et al, 2001

Estimated Shale Gas Resource Potential - 2010

North

America

4,471 Tcf

Latin

America

373 Tcf

West

Europe

559 Tcf

Cent. & East.

Europe

559 Tcf

Former

USSR

5,402 Tcf

Mid East & North

Africa

1,305 Tcf

Sub-

Saharan

1,017 Tcf

Cent. Asia &

China

372 Tcf

Pacific

745 Tcf

IGU 2003, VNIIGAS 2007, USGS 2008, BGR 2009


12

The Rock

Technology starts with exploration and in many

cases this process is much easier technically

compared to the search for conventional

hydrocarbons. The geologic risk of not finding

the deposits is low. However, finding sufficiently

large occurrences with recoverable quantities is

the key. The vital metric of interest is the Total

Organic Carbon (TOC). Commercial deposits in

the US run from about 4-10%. A higher number

is indicative of more gas.

The gas in the shale is in two principal forms.

One is free gas, much as it is in conventional

reservoirs. The other is adsorbed gas, wherein

the gas is on the surface of organic matter

(again higher TOC is good). It is released when

the pressure drops through production of the

free gas.

This manner of gas storage is similar to that in

coal bed methane. The most productive shale is

high in TOC and is relatively brittle. Some

natural fractures can be beneficial. The low

permeability means that the only way to

produce the gas is by fracturing the rock further.

Hence the need for brittleness. That is a

property driven by the non-organic mineral

composition, primarily comprising oxides of

silicon, aluminium and calcium. Its future

prospects are determined by taking core

samples to establish organic content and

assess mechanical properties of the rock.

Fracturing

Fracturing of the rock is accomplished by

injecting water with some chemicals into the

well under high pressure. In conventional wells,

the water contains a gel (commonly a derivative

of the guar gum seed and essentially the same

material used to thicken ice cream and other

liquids) which increases viscosity. The viscous

liquid is pumped in at high pressure. This

fractures the rock. The liquid is then “broken”

with small amounts of a metallic based

compound called a "cross-linker" to reduce the

viscosity, and it flows back out of the rock.

Before this is done, sand or some other such

material known as proppant is injected into the

fractures. These “prop” the fractures open to

allow gas to flow. Were this not to be done, the

natural stresses in the rock would “heal” the

fractures shut and gas flow would cease. This

healing mechanism is also the reason why

fractures distant from the zone of interest are

unlikely to propagate towards the surface.

Changes in the rock above the shales also

hinder upward growth of fractures.

The conventional fracturing techniques used to

be seen as damaging the production by leaving

gel residue. A breakthrough was the adoption

of Slickwater Fracturing (no gels in the fluid).

Most shale gas operations now run “slick”.

However, some gel may be used on occasion.

The substantial absence of gel allows entry into

micro-cracks and enlarges them. The

drawback is that much more water is needed.

This can be up to 5 million gallons per well. But

the significant plus is that very few total

chemicals (sugars, bromates, polymers and


13

typically chlorine-based biocides) are used, less

than half of one per cent by weight.

Other Technologies

The other major advance that made shale gas

so promising was horizontal drilling. The

technique per se is not new and is practiced all

over the world. The dramatic increase in

production rates over vertical wells justified the

higher cost of these wells. The majority of them

are lined with a steel casing embedded in

cement. Whether cased or not, most of the

wells have what are known as multi-staged

completions. This is a technique involving

isolation of the productive zones and fracturing

just those zones. Ten or more of these zones

are not uncommon. Another technique

employed is directing the well at an angle to the

maximum horizontal stress to allow transverse

fractures, which maximize production. All of

this involves fairly sophisticated geophysical

mapping of the rock.

An important new technique well suited to shale

gas exploitation is pad drilling. This is where

multiple wells are drilled and completed from a

single location. This minimizes the need for

roads and reduces the overall footprint of

operations, especially important in populated

areas, or farmland and other environmentally

sensitive areas. It also allows for a higher level

of sophistication in material handling. As

discussed later, this could be important for

water treatment.

Are These Technologies Available

Worldwide?

In principle they should be available anywhere,

since they are used by the major service

companies operating worldwide. The horizontal

drilling expertise is probably the easiest to

make available. But the high capital cost of

fracturing equipment and materials and its

sheer bulk could well limit availability in some

parts of the world. Furthermore, the biggest

operators are US-based and the rapid

expansion of domestic activity will make this

business segment more attractive and

eventually provide an incentive to expand

abroad.

One factor that could affect all this is that

foreign energy companies are increasingly

taking equity positions in the US shale gas play.

The Europeans have been doing it for some

time, Statoil of Norway, for example and more

recently the Chinese and Indians have entered

the fray. The Chinese focus on Canada‟s British

Columbia (where the shale gas may be even

more promising than in the US). The Indian

giant Reliance Industries has agreements to

take two positions in the US. Almost all the

foreign companies buying into North American

shale gas business are doing it with intent to

acquire and transfer technology. However, it is

not that simple and in the end the technically

demanding work will have to be performed by

specialised service companies, and they will

need incentives, not the least of which will be

assurance of long-term work.


14

1.5 Production Costs of

Shale Gas

There is significant debate over the production

costs of shale gas. Estimates of shale gas

extraction costs in North America range from

US$4- 8/Mcf. The differences in estimates is

significant and complex. On the one hand, low-

price proponents argue that exploitation of

shale gas can be as little as three months from

the beginning of the drilling effort. Further, they

say the ease of hydro-fracturing multiple times

is reason that the price will remain low for the

foreseeable future. High-price proponents

argue that the actual drilling costs are more

significant and will be pushed higher as

environmental regulations are established.

Costs related to water reclamation and

chemical cleanup will add to production costs

which could drive prices between US$6-8/Mcf.

Recent regulations established by the U.S.

Environmental Protection Agency require

drillers to adhere to more environmentally

friendly practices. This will certainly drive

production costs higher. In time, there will be a

better understanding of the exploration price in

each shale basin. The problem today is that

the costs are not well known because it is too

early to understand the implications of decline

rates and environmental regulation. That said,

as new regulations are established, the margin

between shale gas and traditional basin

exploitation costs will likely narrow over time.

Globally, the price of shale gas extraction will

be determined by accessibility, environmental

regulation and proximity to natural gas

infrastructure. In shale basins that are isolated,

of course, the costs will be higher due to the

need for processing stations and pipelines to

markets.

1.6 Shale Performance

Decline Rates

This is roughly defined as the rate at which

production declines after an initial burst known

as Initial Production (IP). The figure of interest

for reserve estimates is the Estimated Ultimate

Production (EUP). The popular literature

among engineers and investors has been

replete with discussion of these parameters.

Much has been made of the fact that decline

rates in shale gas well have been significantly

greater than for conventional reservoirs.

Why might that not be a worry? For one, we

are only just beginning to understand this type

of reservoir. Initial fracturing was done with

gels and impaired the production. When these

were repaired using slickwater, the production

was dramatically enhanced. Currently most

wells use slickwater. But their ability to carry

proppant is poor because proppant is much

denser than water and tends to settle. Many of

the smaller fractures and those further away

from the well bore likely have no proppant.

Initially these will produce and later the earth

stresses will close due to overburden and other

stresses and production will be reduced or stop

from this source. This is one possible

explanation for the high decline rate.


15

Taking this one example, technology will likely

ameliorate this problem. Low specific gravity

proppant is one solution. A more fruitful avenue

would be to radically re-think the problem and

assure flow through some completely different

mechanism for keeping the cracks open. The

general conclusion is that these are early days

and mechanisms continue to be better

understood, and therefore ingenious solutions

for improving productivity are very likely and

should be pursued by the industry.

Re-fracturing

An example of technology already overcoming

early declines is re-fracturing. This is where

new fractures are initiated in existing well bores

that have already been hydro-fractured, often at

the same location as the previous perforations

of the old ones. New rock is believed to be

exposed by this step. This is a technique used

in conventional reservoirs as well, but in the few

cases that it has been tried in the Barnett shale,

the results have improved dramatically, much

more than in conventional wells. The fast

declines in output are then not so important, if

this requirement is met. How will it impact

reserves and hence the size of the national

resource? If it really is economical to keep

punching more holes or keep re-fracturing old

ones, then the play is viable. This is all feasible

only because the deposits are on land and

relatively easy to access. Ultimately, improved

hydro-fracturing technology will probably render

the re-fracturing unnecessary. As to reserves

estimates, here is a truism in the industry -

reserves continue to increase as the new

resource is increasingly exploited. Expect this

to be the case for shale gas as well.

1.7 Environmental Issues

The issues facing shale gas are largely those

common to all petroleum production activities.

They are getting magnified in the Marcellus

exploitation regions because of the novelty of

such activity in the states of New York and

Pennsylvania. The latter was the location of the

first oil well in the US. The placement of wells in

farming areas raises special challenges, even if

the farmers get a new source of substantial

revenue.

The industry has faced similar challenges in

Colorado and some of the recent innovations

will apply. One of the more important ones is

pad drilling. This technique allows the drilling of

multiple wells from a single location. This has

the virtue of aggregating operational equipment.

Given the technical sophistication of these

operations, there are benefits to the operator as

well. It provides, for example, relatively

expensive capabilities such as broad band

satellite and associated decision centers. This

allows to the use of remote monitoring and

decision support, thus minimizing risks. It

should also allow for aspects of regulatory

oversight without major personnel additions

because a single inspector could monitor up to

a dozen or more sites. This point addresses a

concern most prevalent in Pennsylvania today,

that staff needs of regulatory personnel are

inadequate relative to the expected burgeoning

activity.


16

A collateral benefit of pad drilling is the

minimization of building and use of access

roads. This could be particularly important in

farming areas and near centers of higher

population density. The nature of fracturing

operations is such that heavy equipment is

needed at each well head. Pad drilling allows

this to be shared. This will be particularly

important for newer methods for water

treatment that will benefit from economies of

scale.

Chemicals in Fracturing

Operations

The chemicals present in fracturing fluids

can include:

Gels to induce viscosity. These are

derivatives of a natural seed, guar gum.

Most shale gas operations run “slick”,

meaning without any gels. However,

some gel may be used on occasion.

Cross-linking agent - used to make the

gels viscous (boron or zirconium based

organo-metal).

Breakers, to break down the cross links,

if gel is used (often enzymes).

Lubricants (mostly polymers).

Biocides (at present bromine based,

have been chlorine based).

The vast majority of operations use slick water,

so the first three components in the list above

do not come into play. Until recently there has

not been open disclosure of the nature and

amount of each chemical employed. This has

unnecessarily raised the level of anxiety.

Complete disclosure of the nature and

properties of the chemicals should not prove

onerous. Further, environmental studies will

provide additional understanding of the impact

of existing technical processes. For drillers,

resorting to more benign chemical substitutes is

possible, and companies will vie to be greener

as environmental impacts and regulations

become more well known.

In total the concentration of chemicals in

fracturing water is less than half per cent and

often less than a tenth of one percent.

Consequently, combined with an effort to

eliminate toxic chemicals and the likely move

towards recycling of fracturing water, chemicals

in the fracture fluid will become less of an issue.

However, industry will need to do its part by

being transparent and proactive in securing

public support. NGO‟s (non-governmental

organizations) and other stakeholders should

be included in this activity to support

impartiality.

Fresh Water Withdrawals and Flow Back

Water

Slick water practice causes water usage to go

up. Typical wells use between 3 and 5 million

gallons per well. Industry practice has been to

use fresh water as the base. The water that is

brought back up after the fracturing step is


17

known as flow back water. Shale operations

are unique in that only about a quarter to a third

of the water returns, the rest staying in the

formation. Also, the flow-back water is usually

brackish. This is because the water in the

pores is usually very salty, as discussed in the

Geology section. So, in principle it cannot be

re-used.

Handling this salinity is the first big objective of

water conservation. The key is ability of the

water to tolerate some level of chlorides.

Recent research has shown that not only is this

possible, but that it can be beneficial. The

chlorides actually stabilize the clay constituents

of the shale and improve production, although

companion chemicals such as friction reducers

need to be modified. This has two possible

implications to water withdrawals.

One is that after some measure of treatment,

the flow back water should be usable. But

because all of it does not return, withdrawals for

makeup water will be necessary. This is where

the second implication comes in. It should be

possible to get moderately saline water from

another source since salinity is tolerable in the

operation. The most important implication of

the foregoing is that flow-back water could, and

over time should, be completely re-used and

cease to be an issue relative to discharge. Of

course, proper attention to temporary retention

will be required, at it would be for any fluids

handling in a rig operation.

Today, the drilling industry can likely tolerate

40,000 ppm chlorides in its hydro-fracturing

process. If the flow-back water comes in with

higher chloride content, it will need to be

desalinated to some degree, or diluted by fresh

water withdrawals. In some part of the country

this latter operation is likely completely

tractable. Another option could well be to use

sea water, if that was the water of convenience.

Sea water tends to run around 30,000 ppm

chlorides, plus or minus 5000, or so. That is

already in the range of acceptability with the

possible removal of some minor constituents.

Finally there would be the option of producing

from saline aquifers. These are in great

abundance, although with highly variable

salinities. Saline water wells drilled as

companion to the gas wells are very likely in

areas with challenging surface water

availability.

Eventually one could expect the industry to

develop fracture fluids tolerant of even higher

salinities. That would open up some very

interesting outcomes. Today sea water and

brackish water reverse osmosis plants have a

problem waste comprising brines with about

75,000 ppm dissolved solids. This waste could

potentially be usable by the drilling industry,

pending environmental study. The shale gas

industry could move from being a net drain on

the fresh water environment to becoming an

example for water sustainability.

Produced Water

Water associated with the gas is produced at

some stage of the recovery, usually at the tail

end of the process - this is water trapped in the

pores of rock (connate water) in or near the

shale formation. In some cases early


18

production occurs due to infiltration of the

fractures into the underlying saline water body.

The Ellenberger and the Onondaga are water-

bearing formations below the Barnett and

Marcellus reservoirs, respectively. The

Onondaga in particular is very high in salinity

and this unwanted fluid will be produced if the

fracture direction is not controlled. By contrast,

some shale gas reservoirs are very dry

(meaning that they don't have connate water in

or near the shale formations), as for example

portions of the Haynesville (Louisiana).

Whether from connate water or the water layers

below, the water will be very saline, in part

because of the age of the rock. Disposal of this

water is a major issue, especially in New York

and Pennsylvania and can cost upwards of

US$10 per barrel or $500,000 per well, when

even possible. Concern regarding illegal

discharge is high among the residents.

The treatment of produced water represents a

significant business opportunity. Several

companies are developing forward and reverse

osmosis schemes for desalination. Others are

working on bacteria eradication, heavy metal

removal and the like, using methods such as

membrane filtration and ion exchange. Some

of these are already in service on a limited

basis.

Produced water offers the promise of being

usable for makeup water after some modest

treatment. The salinity may be directly tolerable

but any bacteria would need to be removed

prior to re-use. This is because many of these

cause the production of hydrogen sulphide

down hole, which makes the gas less valuable

and causes corrosion in the equipment. Other

reported contaminants in produced or flow back

water are heavy metals which sometimes

contain trace amounts of radioactive material.

The latter are usually extremely low in

concentration but often precipitate out as a

scale with other salts. In that form they are

more concentrated. All of these metals can be

removed by ion exchange, oxidation and other

methods.

Contamination of Drinking Water

There have been anecdotal reports of well

water contamination by gas or the hydro-

fracturing fluid, most recently sensationalized

by a documentary, Gasland. The popular

literature ascribes two hypotheses to this

phenomenon. One is the migration of fracturing

operation cracks from the reservoir up to the

water body. The other is gas or fluid leakage

from the well.

Aside from the fact that cracks will not

propagate the significant distances to the

aquifers, were they inclined to do so, they

would likely heal due to the earth overburden

stresses. In terms of distance, the closest fresh

water aquifers are vertically about 5000 ft. and

3000 ft. away, respectively, for the Barnett and

the Marcellus.

Gas leakage from the well should not happen if

the well is drilled and completed correctly. A

fundamental feature of regulation has always

been to design for isolation of fresh water in all

petroleum exploitation, not just in the shale.


19

Between the produced fluids and the aquifer lie

two layers of steel encased in cement. The first

layer is the so called Surface Casing and the

second is the Production Casing. There may

be more layers, but this is a minimum. The

cementing operation is designed for preventing

fluid migration. Tests are run to ensure

competence of the cement job and remedies

are available for shortcomings. At these

shallow depths the operation is extremely

straightforward and amenable to regulatory

oversight.

In summary, the environmental issues related

to shale gas production can be addressed in a

similar way as for other fuels, i.e. by a

combination of technology, regulation, and

transparency. The importance of shale gas to

national priorities such as energy security, a low

carbon future and health of industry calls for all

concerned collaborate to expeditiously

understand and then deal with the issues.

1.8 Renewable Standards

and Carbon Regulation

Climate change concerns leading to regulation

on CO2 production and greenhouse gas (GHG)

management are under development and

discussion at both national and international

levels. The concern about climate change has

increased the interest in renewable energy

sources and to some degree nuclear power for

electricity generation as the means to limit

future increases in GHG emissions.

The US federal government has not yet

implemented a national renewable portfolio

standard but is having substantive discussion

and such a standard may well be expected in

the next several years. Left to pure market

dynamics, renewable technologies have not

fared well against traditional fossil fuels and

hydro-based electricity generation or

transportation fuels. The sources of energy that

are recognized as renewable include biomass,

solar thermal, solar photovoltaic, wind,

geothermal, small and large hydroelectric

schemes, digester gas, municipal solid waste

conversion, landfill gas, ocean wave, ocean

thermal, and tidal.

Advanced clean technologies for fossil fuels,

including carbon capture and sequestration,

can achieve significant CO2 reductions but

presently they are not considered as

commercially deployable. That said, natural gas

has half the carbon as coal and therefore half

the carbon output. Should regulation limit

carbon output, natural gas will certainly be a

winner.

The energy demand of the world is huge and

growing fast, as emerging nations become

increasingly prosperous. The challenge of

meeting the scale and rapid growth in energy

demand from renewable energy is daunting

both from the magnitude of the need and the

economics of addressing it with renewable

sources. Shale gas can play an important role

of balancing a system with a high share of

intermittent renewable sources.

In addressing the GHG challenge and scale of

energy demand a major increase in supply and

use of natural gas as an alternative to coal may


20

provide a bridge to the future that makes the

changes required over the next several

decades more palatable if that gas can be

made economically available. Over the past

several years there has been no new coal

facility built in the United States. This

underscores investor concern over pending

regulatory action by states or the federal

government related to carbon emissions. On

the flip side, gas-fired power plants are in

development and the additional resource of

shale gas not only makes the plants more

economically viable but also hedges against

potentially punitive carbon regulation.

However there are increasing concerns of the

environmental challenges to be addressed in

pursuing this source. There is also the reality

that methane (natural gas‟ major constituent) is

a GHG with a much more significant near term

(within 20 year time frame) heating impact on

the atmosphere than CO2.

Renewable energy sources are also facing

increased environmental scrutiny as their

locations may sometimes interfere with

endangered species or utilize significant

quantities of water relative to the actual power

they produce.

Geothermal energy production has been known

to bring up and release CO2 or even hydrogen

sulfide. Solar areas have concerned

biodiversity - the desert tortoise and sage

grouse - as well as use surprisingly significant

quantities of scarce water for thermal solar

plants. Newer plant designs include air cooling

with corresponding higher investment and new

heliostat designs that do not require clearing of

desert terrain. It would seem there are no

absolute simple best answers but the

opportunity through balanced consideration of

the various issues to move forward addressing

demand, environment and economics wisely

can lead to better solutions.


21

2.1 Exploration and Production

To understand exploration and production

issues of shale gas, it is necessary to

understand the specific issues faced in the

mature shale gas plays in North America and

the emerging shale gas plays elsewhere.

North America

Massive exploration and exploitation of shale

gas has begun in earnest in North America over

the past few years. The result of the

exploitation activity has resulted in the region

becoming a net exporter of gas, instead of

importer. Energy utilization actions now range

from shifting electricity production from coal to

the potential of shale gas driving change in

transportation fuels market. Time, investment

decisions and public policy will likely influence

the outcome of the impending decisions.

Exploitation of traditional gas basins over the

past several decades resulted in the

development of infrastructure like pipelines,

storage systems, processing stations and a

distribution network for commercial utilization.

This infrastructure is currently utilized for a

good part of the shale gas production.

However, significant shale reserves lie outside

the existing pipeline grid and require capital

investment to build the infrastructure necessary

to utilize the gas. According to the Interstate

Natural Gas Association of America, it is

expected that US$133-210 billion will need to

be invested during the next 20 years to process

the gas coming from shale and other tight gas

formations. The lesson is that extracting shale

gas is only one cost, processing and distributing

it downstream add other costs, but clearly have

not deterred investment into these more remote

fields.

Prudent management of capital or the lack of it

is also an issue in North America. Although

spot prices for natural gas have other factors

involved than just supply & demand

fundamentals, the spot price of natural gas has

fallen from over US$13 (US¢46) in 2008 to

under US$5 (US¢17) per mBTU in mid-2010.

Although the global economic slowdown was

part of the price decline, the ramping up of

shale gas extraction has also flooded the

natural gas market during the same period.

In a rush to exploit shale gas, producers have

caused a glut in natural gas supplies resulting

in record highs of natural gas supplies in

storage. Given that some traditional gas

basins have productions costs of US$4-5 per

mBTU (US¢14-18/cm), the aggressive pursuit

of shale gas is causing production losses at

traditional gas fields.

Consequently, this pace of natural gas

production is not sustainable and evidences the

lack of capital discipline and over-drilling at

present. Over time, equilibrium will be found

between supply and demand, which means

supply will lessen or demand will increase

2. Impact of Shale Gas


22

Exxon Mobil's acquisition of XTO is an example

of how valued shale gas production is to the

future of oil majors. Total, British Petroleum,

Exxon Mobil, Conoco Phillips, Shell, Chevron,

Repsol and other oil majors have begun to

invest in shale gas production.

This indicates a strategic shift in portfolio for the

major oil companies. Given the capital

requirements of extraction, processing, storage

and distribution, it is likely that oil majors will

play a significant role in the exploration and

extraction of new shale gas plays inside and

outside North America. The consequence of

oil majors in shale gas plays is unclear at

present other than a general expectation of

more stringent operational procedures relative

to environmental protection.

2.2 Demand Drivers & Fuel Switching

Since natural gas is central to many industrial

goods and processes, its availability and price

can have a profound effect on the economy. A

few years ago the sustained high price of

natural gas had a considerable downstream

effect on many industries, particularly the

chemical industry. Natural gas pricing is largely

regional, because the gas transport over

distances has a high cost. Over the water, it

can only be transported as liquefied natural gas

(LNG), which typically adds about US$3-4 to

the price (mBTU), depending on the distance.

Consequently, if a given region has sustained

high natural gas prices, certain industries will

not be viable and could be forced to relocate.

Over time, gasification of biomass or even coal

- if it can be kept clean - will provide a source

for some of these chemicals. However, today

natural gas has no economic alternative. A

reliable domestic production and supply of gas

at low to moderate prices can offer the required

certainty to industry.

For natural gas to replace coal as a producer of

electricity in any material way, there must be an

assurance of supply and a reasonable price in

the short to medium term. Gas replacing oil can

be through the electric car route or direct

combustion in vehicles, compressors and the

like.

Gas Replacing Oil

Compressed natural gas (CNG) is often used in

fleet vehicles and public vehicles. Most buses,

taxis and rickshaws in New Delhi and Kuala

Lumpur are powered with CNG and the

beneficial effect on the air quality has been

remarkable. This is because the fuel replaced

is diesel, which has high particulate emissions.

The Pickens Plan utilizes abundant natural gas

resources in the United States to reduce US

reliance on foreign oil and to improve security of

supply for transportation fuels. The Pickens

Plan calls for widespread adoption of the switch

with gasoline as well. In cars, the downside is

the gas container taking up trunk space. On

the plus side natural gas is cheap. The cost per

unit of energy is about one third that of oil in the

US today. Supply infrastructure for CNG is also

an issue, especially for trucks.


23

Electric cars offer another solution for road

transport. Aside from the zero tail pipe

emissions, the allure is the high efficiency. The

so-called well (or coal mine) to wheel efficiency

of gasoline powered vehicles is around 16%.

Using the same assumptions, that number is

close to 28% for electric cars when the

electricity is produced from a natural gas-fired

power plant. That is a huge improvement in

fuel used to drive the same number of miles.

The fuel cost will be a fraction of the price of

gasoline provided low cost night charging is

done. From a natural gas consumption

standpoint this is an indirect route through

electricity generation.

Gas Replacing Coal

Many coal-fired generators are being retired for

cost and/or environmental reasons. Their

replacement with natural gas-fired plants is

lower cost even when compared to regular coal

fired plants. Operating costs are therefore the

dominant contributor to the unit cost of

electricity generated. As a rule of thumb, gas at

US$4 per mBTU (US¢14/cm) will deliver

electricity at about 4.5 cents per kWh. Coal will

on average deliver at about 6 cents per kWh

but can also be cheaper with fully depreciated

equipment. If coal emissions are reduced to the

natural gas levels, that should add about 3.5

cents to the cost of electricity.

Security of Supply

About three years ago this issue would have

had a different answer. The discussion would

be about liquefied natural gas (LNG) imports

and environmental risks posed by that. Shale

gas has changed all of that. The US can

expect to be self-sufficient in gas for a hundred

years. In fact, it may become a net exporter of

LNG. As an alternative, the US could reopen

the possibility of LNG export of Alaskan North

Slope gas. Due to the net shortages in the US,

this had been politically impossible except for a

single permit for LNG export from the Cook

Inlet. Now, that may no longer be an issue and

in fact ConocoPhillips has sought an extension

to the Cook Inlet permit. Shale gas from the

Horn River basin in British Columbia is already

slated for LNG export by Apache. Gas export

from North America could become a marketing

force in the coming years.

2.3 Traditional Sources of Natural Gas

Unconventional Natural Gas has gained much

recognition recently with the breakthroughs in

technology allowing more economic access and

large-scale production of the shale gas plays. It

would almost be easy to forget that the world

still gets the majority of it natural gas from

traditional basin reserves of which 46% are

located in the Middle-East & North Africa

(MENA) region. While the traditional basins are

to some degree diminishing in their productivity,

there are still very large and significant

quantities of gas to be realized but at

incrementally increasing marginal costs.

The traditional large basin holders had

contemplated the formation of something akin

to OPEC (e.g. Russia, Iran, Qatar, etc.). But

with the rapid pursuit of shale gas resources

such an international organization is unlikely to


24

organize, at least for now. Although, shale gas

resources are likely to impact traditional gas

producing nations, the impact may not be

negative. For example, Russia, has significant

traditional reserves along with significant

quantities of shale gas resources. New

downstream infrastructure built to exploit shale

gas will benefit tradition basin owners as well.

LNG from traditional basin resources will

continue to provide liquidity of movement to

those traditional customers. Where significant

quantities of shale gas can access

infrastructure to LNG preparation and shipping

terminals there may an economic impact on the

LNG markets not presently evident.

Another aspect of traditional gas sources in

North America (especially the US) is that often

traditional gas deposit opportunities have been

placed off limits by environmental policy

decisions. The development of ever more

environmentally benign access technologies

that are economically viable may in the future

bring more traditional gas resources back into

play.

2.4 Pipeline Infrastructure World gas resources are plentiful but the

regions with natural gas surpluses are often

literally oceans away from the greatest demand.

While the technologies exist commercially to

meet the challenge of developing resources

and delivering natural gas to markets where its

use is growing often the cost and time required

to authorize and construct the infrastructure

leads to decades of delay in the realization of

benefit by all parties.

The re-discovery of shale gas has broadened

the potential opportunity for some countries

previously not anticipating significant domestic

natural gas resources. Many of these countries

have immature or non-existent gas

infrastructure.

The West European continent and the North

American continent have fairly mature and well

developed gas pipeline and storage

infrastructure systems. Yet even these

relatively mature systems will be challenged by

a substantial increase of natural gas supply and

use. This was indicated in the recently

released 2010 Congressional Report Services

(CRS). This report, on the use of natural gas to

displace the use of coal in the US for electricity

generation recognized that while the quantity of

natural gas could address and displace up to

(35%) of coal-based power production.

Coal proponents argue that when real-world

constraints are factored into the analysis (e.g.,

transmission systems, dispatch, supply and

price, transportation, and storage), natural gas

could replace only 5%-9% of coal-fired power

generation (i.e., no more than 4.5% of total

electricity generation).

The dynamics of gas infrastructure operation

are significant and require much more than

pipelines. The existence of infrastructure if

already in full use will not permit the expansion

of more gas into the system without additional

infrastructure. Another aspect increasing the

complexity of moving gas from its source to the

end user is the fact that in many areas of the

world, pipelines need to cross borders between


25

countries which may create additional or new

geopolitical challenges for the development of

infrastructure and operations.

An often undervalued but essential part of the

infrastructure is storage. Not all geological

areas are amenable to providing storage. The

operation of the pipeline and the consistent

provision of supply at pressure as demands

may swing with weather and other influences

are best and most cost effectively addressed by

adequate storage. China is developing the

second extremely long East-West natural gas

pipeline from Turkmenistan to serve Eastern

China‟s high population centers. Further, they

are adding substantial storage capacity along

the pipeline inside China. India is also

significantly increasing it pipeline infrastructure

and storage capabilities to benefit from the

addition of both LNG terminals and expanded

gas field development.

2.5 Gas Prices in the Future Major movements in capital do not easily occur

in an uncertain pricing environment. Clean

coal-based electricity can be expected to cost in

the vicinity of 9 cents per kWh. This assumes

that coal-based power will need to reduce

emissions to levels present in natural gas-fired

power (like the mandates in California). It also

assumes that technology will be available for

bolting on to existing plants and that it will be

applied to the newer plants carrying

depreciation.

For natural gas to be cost-competitive, it will

need to be priced something under US$8.50

per mBTU (US¢30/cm). Today the pricing

hovers close to US$4 per mBTU (US¢14/cm)

What can one expect in the future?

Commodity pricing is extremely hard to predict.

After all, this is a fuel which spiked to US$13

per mBTU (US¢46/cm) not that long ago.

However, a close examination of the data

shows that over a decade the price was above

US$12 per mBTU (US¢42/cm) for only about

four non-contiguous months. The true comfort

regarding price moderation comes from the

setting in which shale gas is found.

In the United States, most shale gas is either

proximal to the intended market, as in the case

of the Marcellus, or close to major pipelines, as

in the case of the Barnett, Haynesville, and

Woodford, to name just three big ones.

Compared to conventional gas, these

wells are relatively shallow and on land.

When prices go up, new gas production

can commence in 90 to 180 days. This

short time span will basically keep a lid

on natural gas prices. Speculators will

be aware of the quick response ability.

This throttle effect will likely keep prices

under US$8, possibly even lower.


26

At numbers over US$4 per mBTU

(US¢14/cm) most operators will make

a very good profit. An indication is the

price being paid for shale gas assets

today. So the businesses will be

sustainable and continuous supply

assured. Note: LNG has a built in cost

of US$3-$4 just to transport it, over and

above the production cost.

In summary, a major shift from coal to natural

gas is a sensible and likely course of action. In

the US, one can expect supply to remain robust

and pricing to remain moderate to low. For the

world, shale gas resources are likely to have

regional impacts in proportion to the volume of

shale gas reserves.

The substitution of oil is a priority in many

countries, at a different level: reducing the

reliance on imported oil. Here too, assurance

of reliable domestic supply of natural gas and a

low natural gas price can only help.


27

The emergence of shale gas has strategic

implications on geopolitics and the energy

industry. European dependency upon Russian

Gas has seen stormy times and created

tensions between exporter, transfer and

importer nations. Dependency on foreign oil

has plagued domestic politics in countries like

the United States and China for years.

Global companies have invested billions in

establishing an international market for LNG

which now seems threatened by the vast and

dispersed resource of shale gas. Coal

switching to natural gas has traditionally been

an economic decision, but now in many

countries, decision making is shifting to

economic & environmental considerations.

Although global resource estimates are still

theoretical, the following analysis provides

insight as to the likely manifestations of shale

gas impact in the years to come.

European Dependency upon Russian Gas

When the Ukraine had gas turned off by Russia

due to political tension between Kyiv and

Moscow, the act was seen as a direct threat to

all gas importing nations in Europe. Leaders

across Europe are hopeful that shale gas

quantities in Europe will help alleviate the

reliance on Russian gas. European industries

willingly participate in exploration and extraction

of resources but this has only just begun in

Poland and the Ukraine.

Current resource data, presented earlier in the

paper, indicates that European shale gas is

limited and not as large as expected in previous

estimates. That said, only a few of the more

than 20 shale formations in Europe have had

shale gas exploration. Therefore, Europe is

likely to see increases to the shale gas

resource and reserve estimates in the coming

years. Although European shale gas may add

gas reserves, it is unlikely to offset the

continuing decline in existing reserves and the

increased demand for natural gas due to the

phase out of European power generation

facilities over the next two decades. Additional

European demand impetus will come from the

aging power generation infrastructure, where

nearly 30% of base load capacity will need to

be replaced within the next two decades. It is

unlikely that nuclear or CCS will be able to

close the emerging gap.

Although Europe is likely to benefit from US

exports of LNG, rising demand in Europe will

not be satisfied by these new resources. As

such, Russia will continue to supply European

countries with natural gas, including shale gas

for decades.

Transportation Fuel - Dependency on Oil

China and the United States are dependent

upon foreign oil to feed their economies,

particularly their transportation systems. In

both countries, dependency on foreign oil has

led to political challenges. In the United States,

presidents must address the energy security

threat posed by dependence on foreign oil.

With oil at US$80 a barrel, the United States

sends over US$500 billion to oil producing

countries every year. Natural gas proponents

are getting louder and gaining more political

3. Strategic implications


28

traction as the emergence of domestic shale

gas supplies is seen as a potential transitional

fuel that can be used to develop transportation

fuels (CNG and GTL).

Metropolitan bus systems and taxis are already

shifting to compressed natural gas. This trend

will continue as energy security proponents

argue that the low price of natural gas can help

rid dependency upon foreign sources of oil.

Shale gas reserve statistics do support the

claim that natural gas could be used in the

transport fuel sector for many years. Chinese

shale gas resources are not as thoroughly

known or understood as the United States

resources. In China there are over 20 shale

formations that need to be explored for shale

gas potential.

As exploration commences in the coming years,

it is likely that China will use a majority of the

resource for power generation, the rest may go

toward transport fuels. Given China's growing

energy demand, it is unlikely that domestic

supplies of shale gas would remove the need

for energy imports from Central Asia and the

rest of the world. The likely outcome is that

China will continue to burn coal to help meet

rising demand for electricity.

Liquefied Natural Gas

LNG terminals have been established across

the world at enormous expense to industry.

The emergence of shale gas impacts the future

of LNG in three ways: First, LNG importing

countries like the United States are likely to

stop importing LNG and may even become

exporters of LNG. But, obtaining permits for

export of LNG from the USA may prove

extremely difficult. Second, the distribution and

exploitation of shale gas may suppress LNG

demand for a few years. Third, the vast

supplies of shale gas are likely to promote

further shifting of demand to natural gas, which

in turn will strengthen the global LNG market,

particularly due to the build-out of natural gas

pipelines which will aid LNG over the long-term.

In the mid to longer term, gas dependency

could be as "addictive" as the present oil

"addiction".

Liquefaction and transport carries a cost of

approximately US$3.00 to US$4.09 per mBTU.

As a result, LNG costs face headwinds

competing in markets that have increasing

supply of low cost shale gas coming on-line.

LNG import terminals in the United States are

now being designed to export LNG.2 This

development is likely to be good for the LNG

industry because it further develops distribution

channels. That said, the vast supplies of shale

gas coming online suppress the needs for North

American imports of LNG. This will be the case

for years to come.

The addition of shale gas supplies is likely to

put downward price pressure on natural gas.

Expected low natural gas prices will shift

demand away from higher priced energy to the

lower priced gas. This downward price

pressure will be met with additional demand. It

2 http://phx.corporate-

ir.net/phoenix.zhtml?c=101667&p=irol-newsArticle&ID=1434471&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=101667&p=irol-newsArticle&ID=1434471&highlight=




29

is this additional demand that will likely improve

the condition of LNG markets, but there will be

a lag effect to the exploitation of natural gas.

Power Generation - Coal Switching to Gas

As shale gas production ramps, natural gas

prices decline. As long as power generators

have visibility which indicates gas prices will be

lower than coal on a BTU basis (potentially

including carbon mitigation costs), power

generators will shift toward natural gas power

generation.

Low gas prices over the long term will make it

very difficult to implement high-capital-cost

clean coal technologies, particularly given the

public perception of coal production and use

versus natural gas. It will also impact the

economic justification of CCS and likely delay

its implementation for years, depending upon

the cost of carbon emissions.

Britain Case - Strategic Decision

Disappointment

In the 80s and 90s, Great Britain built out a

natural gas infrastructure based upon projected

vast supplies of natural gas from the North Sea.

Billions of British Pounds were invested into the

infrastructure development. As time passed,

and decline rates increased, it became clear

that Britain had invested in a resource that was

not unlimited.

As such, there has been domestic political

fallout from the heavy investment into the North

Sea infrastructure, which left Britain reliant on

expensive LNG imports.

Decision makers and investors will likely use

the British case to scrutinize the investing

decisions surrounding shale gas, particularly in

countries where existing infrastructure is

minimal or non-existent.

Relationship between Gas and Oil

For a few years now there has been a

disconnect between oil and gas

prices. Curiously, the more environmentally

challenged resource, oil, is currently priced at

roughly three times gas price. That is

commodity pricing in action.

The disparity is even greater when refining

costs are taken into consideration. The price

differential is a result of the value of the internal

combustion engine being the workhorse of

transportation and economies.

In developing economies, the largest of which

had substantial net GDP growth even in 2009,

prosperity equates to the transition from

bicycles to scooters to cars. Fuel for mobility

will therefore be the single greatest factor in

demand improvement of natural gas in an

environment where oil gets harder to extract

and higher in price.


30

Abundant and inexpensive natural gas will also

be a boost to industrial productivity as a whole

because it is the backbone of so many

industrial goods. The collateral benefit of gas

being potentially available more widely than

today is security of supply. Currently oil and

gas imports cause net importing nations to pay

not only market but also political and military

prices, in addition to other externalities.

Abundant supplies of shale gas could help

correct this price imbalance.

‘…..it is far too early to conclude whether shale gas will make as much of an impact outside the

US as it has done inside the US....’

Helge Lund, CEO, Statoil


31

Definitions

Natural Gas Resource Definitions (Source:

EIA):

'Unconventional' natural gas does not exist

in these conventional reservoirs - rather, this

natural gas takes another form, or is present

in a peculiar formation that makes its

extraction quite different from conventional

resources.

The Natural Gas Resource Base - The broadest classification of natural gas estimates is generally termed the natural gas resource base. According to the U.S. Energy Information Administration the total natural gas resource base includes the entire volume of natural gas contained and trapped in the earth, before any is extracted and produced.

Economically Recoverable Resources - Economically recoverable resources are those natural gas resources for which there are economic incentives for production; that is, the cost of extracting those resources is low enough to allow natural gas companies to generate an adequate financial return given current market conditions. However, it is important to note that economically unrecoverable resources may, at some time in the future, become recoverable, as soon as the technology to produce them becomes less expensive, or the characteristics of the natural gas market are such that companies can ensure a fair return on their investment by extracting this gas.

Reserves - Those discovered, technically and economically recoverable resources are further broken down into different types of 'reserves'. Organizations measure reserves for their own use and for outside publication, often using different measuring and estimation techniques for the different types of reserves. However, in general, reserves can be broken down into two main categories - proved reserves, and other reserves.

Proved Reserves - Proved reserves are those reserves that geological and engineering data indicate with reasonable certainty to be recoverable today, or in the near future, with current technology and under current economic conditions.

Produced Water - Water associated with the gas is produced at some stage of the recovery, usually at the tail end of the process - this is water trapped in the pores of rock (connate water) in or near the shale formation. Flow-Back Water - The water that is brought back up after the fracturing step is known as flow back water.


32

1. Groppe's Argument for the Doubling of Gas Prices - http://seekingalpha.com/article/207668-

groppe-s-argument-for-the-doubling-of-gas-prices-part-ii?source=from_friend

2. Cohen, Dave. "A shale Gas Boom?". 25 June 2009. Post Carbon Institute: Energy

Bulletin. http://www.energybulletin.net/node/49342.

3. Congressional Research Service. "Unconventional Gas Shales: Development, Technology, and

Policy Issues". 30 October 2009. R40894. http://www.fas.org/sgp/crs/misc/R40894.pdf.

4. Dizard, John. "The shale gas fairytale continues". 18 July 2010. Financial Times.

http://www.ft.com/cms/s/0/9e6c7b40-9103-11df-b297-

00144feab49a.html?referrer_id=yahoofinance&ft_ref=yahoo1&segid=03058.

5. Hopkins, Chris. "Unconventional Gas - Beyond North America". Presented at CERA Week 2010.

Schlumberger Oilfield Services.

6. Moniz, Ernest et al. "The Future of Natural Gas: An Interdisciplinary MIT Study". Interim Report.

June 2010. Massachusetts Institute of

Technology. http://web.mit.edu/mitei/research/studies/naturalgas.html.

7. National Energy Technology Lab. "Modern Shale Gas - Development in the United States: A

Primer". April 2009. www.netl.doe.gov.

8. Pickens, Boone. "Pickens Plan". 15 August 2010. http://www.pickensplan.com/.

9. Vaughn, Ann and David Pursell. "Frac Attack: Risks, Hype, and Financial Reality of Hydraulic

Fracturing in the Shale Plays". 8 July 2010. Tudor Pickering Holt and Reservoir Research

Partners.

4. References

http://seekingalpha.com/article/207668-groppe-s-argument-for-the-doubling-of-gas-prices-part-ii?source=from_friend

http://seekingalpha.com/article/207668-groppe-s-argument-for-the-doubling-of-gas-prices-part-ii?source=from_friend

http://www.energybulletin.net/node/49342

http://www.fas.org/sgp/crs/misc/R40894.pdf

http://www.ft.com/cms/s/0/9e6c7b40-9103-11df-b297-00144feab49a.html?referrer_id=yahoofinance&ft_ref=yahoo1&segid=03058

http://www.ft.com/cms/s/0/9e6c7b40-9103-11df-b297-00144feab49a.html?referrer_id=yahoofinance&ft_ref=yahoo1&segid=03058

http://web.mit.edu/mitei/research/studies/naturalgas.html

http://www.netl.doe.gov/

http://www.pickensplan.com/

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